The rally in s0-called “junk bonds” and junk bond exchange traded funds (ETFs) has been one of the market’s strongest since mid-July.
The winning stocks have been the companies with a rating of BB or lower, also known as “high-yield junk,” explain Jennifer Alban and Rodrigo Campos for Reuters. Shares prices for junk companies are up between 21%-29% as of Aug. 4. By comparison, investment-grade companies with a BBB rating and higher are up 9.5%-19.25% for the same period.
Part of the reason for this rally is that the most beaten-down areas and sectors tend to have the furthest to go in a recovery. Companies with high credit ratings have a tendency to weather challenged markets better, so when a rally takes place, they usually don’t skyrocket.
Some analysts believe that the recent junk rally can’t sustain itself unless higher quality companies join in on the growth sooner rather than later. The higher-rated companies have less growth potential, though, so their earnings prospects may need more time to kick in.
Have a strategy and a stop-loss in place to protect yourself when the trend shows signs of ending.